NEW YORK, Jan 25 (Reuters) - Treasury yields fell on Thursday after a report showed the U.S. economy grew faster-than-expected in the fourth quarter of 2023, with a component of the data revealing the pace of inflation fell below the Federal Reserve's 2% target.

U.S. gross domestic product increased at 2.5% in the last quarter, the Commerce Department's Bureau of Economic Analysis said, faster than the 2.0% rate that economists polled by Reuters had forecast.

The report also showed fourth-quarter inflation pressures subsiding, with the personal consumption expenditures (PCE) price index increasing just 1.7% from 2.6% in the third quarter.

Bond yields slid, with the yield on the two-year Treasury note, which reflects interest rate expectations, falling 3.7 basis points to 4.341%. The yield on the benchmark 10-year note fell 4 basis points to 4.138%.

The market reacted to signs of inflation slowing further, said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York.

"All they're looking at is the inflation number. They're just looking at that inflation component and they're saying that maybe we've pushed yields a little bit too high," he said.

The slowing pace of inflation is surprising considering the strength of the U.S. economy. "Inflation has come down against a very, very strong domestic economy," Ricchiuto said.

Expectations that the Fed will cut interest rates when policymakers meet in March rose slightly to 45.4% from 41.2% on Wednesday, according to CME Group's FedWatch Tool.

The Fed is expected to keep its target rate unchanged at the current 5.25%-5.50% range when policymakers meet next week.

When the U.S. economy will slow enough to allow the Fed to cut rates is unclear, as growth in the first quarter on a seasonally adjusted basis always decelerates, Ricchiuto said, adding that "this Fed wants to cut rates."

The yield on the 30-year Treasury bond was down 4.3 basis points to 4.370%.

The difference in yields on two- and 10-year notes was at -20.9 basis points. The curve has been "inverted," jargon for when the shorter-dated security's yield is higher than the longer-dated one since July 2022 in what's proven in the past to be a recession harbinger.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.276%.

The 10-year TIPS breakeven rate was last at 2.288%, indicating the market sees inflation averaging about 2.3% a year for the next decade. (Reporting by Herbert Lash; Editing by Sharon Singleton)